What Is a Starter Home?

 A young couple unpacks boxes in a home.
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DEFINITION
A starter home refers to a home purchase that is a buyer’s first home that helps them build equity until they can afford another home.

A starter home refers to a home purchase that is a buyer’s first home that helps them build equity until they can afford another home. They are generally smaller and less expensive, making them more accessible to first-time buyers.

Definition and Examples of Starter Homes

The two main features of a starter home are generally that they are more affordable than the average home in a given market and that they are smaller. They may also have features that would make them less than ideal for long-term living for many buyers.

The exact definition of a starter home may vary. For example, Freddie Mac defines it as a home that is 1,400 square feet or less.

Homes that are listed for less than the median home price in a market are often good candidates as starter homes. These homes might be smaller in terms of square footage or have smaller lots. They may be in less desirable neighborhoods or school districts or they may require quite a lot of maintenance work or repair. 

A “fixer-upper” is a home that can make a good starter home for some people. These are homes that need quite a lot of repairs, so they are generally more affordable than comparable homes in better condition. So, first-time buyers who are willing to make upgrades and renovations can save money and build equity.  

Real estate agents can discuss starter homes with buyers who want to own a home but don’t yet have the money for their ideal home. Perhaps their ideal home is near $400,000, but their budget for a home is $200,000. A real estate agent might show them homes in their price range that can help them build equity to help them eventually buy their “forever home.”

How Do Starter Homes Work?

People buy starter homes for various reasons. Some only need a smaller home now but they plan to grow their family and eventually move to a larger home. Others may only want a home where they intended to work for several years and then change locations. Still others may want to stop making rental payments and start building equity

Building equity is a key advantage of buying a starter home. Equity is the value in your home that is truly yours and does not have a lender interest. To calculate equity, you would take the value of your home and subtract any loans you have outstanding. It’s essentially the money you would have if you sold the home and paid off your mortgage. 

Many financial advisors recommend only buying a home if you intend to live there for three to five years to make it worthwhile, financially. However, rapid price appreciation in some markets can help homeowners build equity even faster. 

If you’re aiming to build equity with a starter home, keep in mind that if you want to avoid capital gains tax on profit from the sale of your starter home, it will need to be your primary residence for at least two years out of the past five years from the sale date. 

Market Trends in Starter Homes 

In recent years, more people are buying a home later in life. Some may even skip buying a starter home to build equity to buy a forever home and will rent until they can afford to buy the long-term home they want.

In the past decade, the supply of smaller and more affordable starter homes has steadily declined.

Appraiser Woody Fincham, the president and founder of Fincham & Associates, told The Balance in a phone interview that he has seen a trend where more investors are buying starter homes to take advantage of the short-term rental market, which has driven up their prices.

In addition, an analysis by the U.S. Census Bureau and Zillow showed that around 2 million American renters who could not afford to buy in their metropolitan area near their job could afford a typical U.S. starter home if they could work remotely and buy a home elsewhere. 

Are Starter Homes Worth It?

For many first-time homebuyers, starter homes can be a path to the financial stability that homeownership can provide. They can help homeowners build equity through their mortgage payments and home price appreciation that they can later use to buy a home they’d like to live in for the long term.

For some buyers, buying a starter home might also result in a lower monthly housing cost compared to their rental payment.

However, starter homes aren’t necessarily the best option for everyone. For some, it may make more sense to keep renting and potentially save up more for a larger home purchase. Others may be in a financial position to purchase a long-term home without buying a starter home. 

Depending on the trends in your housing market, buying a starter home may not be in your financial best interest if you don’t plan on living in the home for at least three to five years. 

 If you’re considering buying a starter home, take time to calculate and compare your potential costs with each housing option, both in the short term and long term. Consider consulting a financial advisor to guide you through your options. 

Key Takeaways

  • A starter home is a home that serves as a stepping stone to another home.
  • Starter homes are generally smaller and less expensive than other homes in the market and they may need repairs.
  • Starter homes can help buyers build equity in the home that they can use toward buying a larger, more expensive home.
  • In recent years, the supply of starter homes has been on the decline as more investors are buying them for rental income.

Article Sources

  1. National Association of Realtors. “Five Housing Trends in a Pandemic Year.”

  2. Freddie Mac. “How Many Starter Homes Are Being Built in Your State?” 

  3. National Association of Home Builders. “How To Attract Millennial Home Buyers.”

  4. Joint Economic Committee. “Unlocking Millennial Homeownership.”